Discuss whether taxing the manufacturers of high-sugar drinks is a justified means of tackling the impact of diabetes and other weight related illnesses

According to the neoclassical Rational Choice Theory, individuals seek to maximise their own utility. The first justification of a tax on sugary drinks is therefore based on the idea that the consumer does not consider the external costs of his/her actions. In this instance the choice of the individual to consume high levels of sugar can result in diabetes and other illnesses. This financial cost is not borne by the individual, but by the NHS, which is estimated to spend £10bn a year on treating diabetes. Therefore the marginal social cost (MSC) is greater then the marginal private cost (MPC), resulting in a negative externality to the economy (Diagram on whiteboard). As consumption results in a negative externality, sugar an be considered a demerit good.
A tax which internalises the negative impact is known as a Pigouvian tax. These can either be unit taxes or ad-valorem taxes. A unit tax is a set amount of tax per unit sold, such as a 10p tax on packets of cigarettes. Ad valorem taxes are percentage based on the value added by the producer. The success of which will depend on the scale and the respective elasticities of demand and supply. It will also depend on whether firms internalise the tax and earn lower margins to maintain pricing or pass on the tax to consumers. However tax revenues earned can be used to finance NHS treatment of diabetes. If taxes are passed onto consumers then there will also be a disincentive to consumer sugar, in theory reducing the incidence of diabetes.